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Are you using the right accounting basis for the calculation of vat conversion from payments to invoice basis?

by , 04 March 2013
When it comes to paying Vat, most business owners don't realise that there are two ways you can account for Vat. Get it wrong, and you could end up underpaying SARS and be liable for a hefty penalty. Here's what you need to know about Vat accounting to ensure you're getting it right...

There are two ways to account for Vat, explains the Practical Vat Loose Leaf Service.

The first is the invoice basis – this is when you declare Vat to SARS on the invoices you issued and received, regardless of whether or not they've been paid.

The second method is the payment basis. This is where you declare Vat to SARS on all payments you've made and received. Essentially with this method, 'you'd calculate your Vat according to your cashbook' says tax consultant Peter Franck in the The Practical Vat Handbook.

But which VAT accounting basis is right for your business?

Not every Vat vendor can use the payment basis to account for their company's Vat. In fact, if you're a company, CC or Trust, SARS will force you to account for Vat using the invoice basis.

Here's a list of Vat vendors that can use the payment basis:

  • Sole traders – a natural person trading on his own with a total income that doesn't exceed R2.5 million a year.
  • Partnerships – with a total income that doesn't exceed R2.5 million a year. Please note, all members of the partnership must be natural persons.
  • An association – such as a sports club – that doesn't exist for gain.
  • A welfare organisation (for instance an orphanage or old age home)
  • A municipality
     

What happens if you need to change the way your company accounts for Vat?

'If you're registered on the payment basis for Vat, and your turnover exceed the R2.5 million mark, you have to notify SARS and it'll change the your details to place you on the invoice basis, from a date it specifies,' explains Franck.

You can do this by visiting SARS's website and submitting your application for change in accounting basis VAT117 form.

And don't forget, failure to do so could result in SARS auditing you and charging you interest and penalties on any Vat amount you should have paid using the invoice basis.

If you need more information on the invoice and the payment basis, get your hands on the Practical Vat Loose Leaf. In the Practical Vat Loose Leaf we've got a dedicated chapter on the invoice and the payment basis. In this chapter you'll discover:
 

  • The 2 bases explained
  • Checklist: 8 vendor types that can use the payment basis
  • Checklist: 6 types of vendors NOT allowed to use the payment basis and must use the invoice basis
  • The payment basis may not apply
  • If you change from one basis to another, you must do a Vat adjustment calculation!
  • Tips to use to your advantage

Get the Practical Vat Loose Leaf here...
 

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